International law firm Freshfields has published an analysis of the UK Financial Conduct Authority's proposed exemption for "truly decentralised" decentralised finance projects, a policy design question that could determine whether a significant segment of the DeFi sector falls inside or outside the British regulatory perimeter.

The FCA has been consulting on how to regulate cryptoasset activities, and the treatment of protocols that operate without a central operator or accountable person has emerged as one of the hardest unresolved questions in that programme. The Freshfields analysis unpacks the regulator's proposed carve-out and its implications for project design, enforcement and market structure in the United Kingdom.

What does "truly decentralised" actually mean?

The core of the proposal is an exemption for DeFi activity where no identifiable person controls the protocol, holds custody of user assets or directs the service's operation. Freshfields examines how the FCA proposes to draw that line, and the practical difficulties that follow. Decentralisation exists on a spectrum: many protocols retain deployer multisigs, admin keys, governance councils or development companies that exercise practical control even where day-to-day operations run through smart contracts.

The analysis addresses the consequences of that ambiguity. Projects that claim the exemption but retain centralised control points could face enforcement once the regime takes effect. Projects that genuinely decentralise must still demonstrate the absence of an accountable party, a question of governance architecture rather than marketing language.

Who carries the compliance burden?

Under the FCA's emerging approach, regulated obligations would attach to persons who perform controlled functions — operating trading venues, holding custody, arranging deals — regardless of the underlying technology. An exemption for fully decentralised activity shifts the perimeter question from the technology to the people. Freshfields considers how firms should assess their exposure: which governance roles, key holdings and treasury arrangements create accountability, and which can be genuinely removed.

This matters commercially. UK-based developers, investors and service providers structuring around DeFi protocols must decide whether to operate within the authorisation regime, restructure toward decentralisation, or restrict their UK-facing activity. Institutional participants in particular face diligence questions about counterparty accountability when no authorised entity stands behind a protocol.

What happens next?

The FCA's cryptoasset regime is being finalised in stages, with the regulator expected to publish further rules and guidance following its consultations. The definition of "truly decentralised" will shape not only who needs FCA authorisation but also how enforcement is directed at protocol teams, tokenholders and governance participants once the framework is live.

Market participants should track the FCA's subsequent policy statements and final rules, which will determine the operational window for restructuring and the point at which unauthorised activity becomes an enforcement risk.